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A 3 minute synopsis of the interview with Jim Rickards, author of New York Times Bestseller The Death of Money: The Coming Collapse of the International Monetary System by Amanda Lang from CBC News – Lang & O’Leary Exchange

Topics:

The Death of Money
Differences and Similarities to the Last Collapses
Inflation and Deflation
Gold
Results of Tapering QE

Jim Rickards

The “Death of Money” means the death of confidence in paper money, starting with the U.S. dollar, but there’s no way that the collapse of the U.S. dollar won’t affect paper currencies around the world.

The subtitle of the book is “The Coming Collapse of the International Monetary System”. It sounds dramatic, but it’s not meant to be because the international monetary system has collapsed three times in the past hundred years — 1914, 1939 and 1971.

These things happen every thirty or forty years. It’s not like clockwork, but it’s been over forty years since the last one.

Periodically the system breaks down and the major powers come together and rewrite the rules of the game.

The Death of Money explains the potential collapse to the readers, and then looks forward to see what the new rules of the game might be.

DIFFERENCES AND SIMILARITIES TO THE LAST COLLAPSES

We had inflation in the 1970s, but we had deflation in the 1930s, and they’re both extremely dangerous.

Right now we have deflation and inflation going on at the same time.

It’s like a tug-o-war and they’re fighting each other to a standstill.

The CPI andPPI are tame — what central bankers would call expectations being well anchored around 1 – 2%.

But there’s a tension.

INFLATION AND DEFLATION

There’s a deflationary vector coming from the fact that we’re in a Depression, and there’s an inflationary vector coming from all the money printing that’s been going on.

These two things are pushing against each other.

It’s unstable and it’s going to break.

Investors need to be prepared for either one — or we might get both.

We might get extreme inflation followed by a Volcker style reaction that tips us into deflation.

Or we might get extreme deflation where the central bankers say, “We, the central bankers, have to revalue the price of gold upwards”. In other words to devalue their currency against gold just to get some inflation going.

It’s a very dangerous and unstable time.

GOLD

Gold gets more valuable in inflation — that’s well known and it’s what happened in the 70s.

From 1977 – 1981 the U.S. dollar inflation was 50% in that very short five year period.

During 1971 – 1980 gold went from $35 an ounce to $800 an ounce.

What’s less well known is that gold does well in deflation also.

Deflation is a central banker’s worst nightmare. It makes Debt-to-GDP ratios worse, it destroys tax collections — if your cost of living goes down, even if your wages are the same you’re better off because everything is cheaper, but the government hasn’t figured out a way to tax that benefit to you, so it destroys tax collections — it also feeds on itself.

If deflation takes hold and central banks become desperate they will cheapen their currencies against gold.

In other words they will revalue gold higher.

During the greatest period of sustained inflation in U.S. history, from 1928 – 1933, gold went up 75%, from $20 an ounce to $35 an ounce.

The best performing stock on the New York Stock Exchange during that same period in the Great Depression was Gold Stake Mining, which was a gold company.

The reason gold goes up in Deflation is because governments make it go up to end the deflation by trying to create some inflation.

RESULTS OF TAPERING QE

Jim has spoken recently with a number of central bankers — members of the Monetary Policy Committee, the Bank of England, members of the FOMC at the FED — and in private settings they say they don’t know what they’re doing.

They’re making it up as they go along. They try something and if it doesn’t work they try something else.

Viewers and listeners shouldn’t assume the FED knows what they’re doing because they definitely don’t.

We don’t have to guess what will happen when they withdraw policy.

When QE1 ended it was 100% tapering. When QE2 ended it was also 100% tapering.

When people say the FED started tapering last December, well they’ve tapered twice before and it failed both times.

Jim expects it will fail again.

The housing market and the stock market are bubbles and they are being kept up with easy money. As soon as the FED withdraws they will begin to crash and come down very quickly.

Janet Yellen was just sworn in and there was no way she was going to tear up policy at her first meeting.

So we had $10 billion in tapering in February and $10 billion in tapering in March.

You’ll get another $10 billion in tapering at the end of April.

There’s no meeting in May.

Watch out in June or July. Jim expects them to pause the taper. They won’t increase asset purchases in one move — they’ll pause.

They tapered into weakness so this year they may actually increase asset purchases.

If they really do go ahead with the taper they’ll probably throw the U.S. into a recession and sink the housing and stock markets.

If they lose their nerve and pause, then increase asset purchases, then Jim expects stocks will be higher later this year but they’ll just be making the problem worse.